Innovation

Building the new future

More about New sources of growth

The global economy has grown spectacularly over the past 50 years, despite several crises. Average living standards have improved worldwide. The ways we produce and consume have been transformed radically, and more people than ever have access to the basic necessities of life. But if progress is to continue to improve people's lives, several challenges have to be met. We cannot neglect the environmental impacts of wealthier lifestyles. Millions of people are still living in poverty, without enough to eat and without decent housing, healthcare or education. Climate change also compels us to find new sources of growth and cleaner ways of managing existing ones.

We asked a number of OECD experts from different policy backgrounds-economics, science and technology, development, agriculture and energy-to answer this question:

What issues and new means to address them are the most important for continued growth?

Tensions between economic growth and the environment are putting strains on key global public goods such as water and the climate. Risks to development are rising as growth continues to draw on and erode the value of natural assets (consumption) at rates in excess of regeneration (saving). Depletion of natural capital is occurring at a more rapid pace in the developing world, but much of the demand which drives this depletion resides in the developed world.

These tensions may undermine the ability to sustain future growth for at least two reasons: substitution of physical capital for natural capital is increasingly costly -- for example, more costly fishing fleets to catch increasingly scarce fish; and change doesn't necessarily follow a smooth, foreseeable trajectory - things can shift suddenly and catastrophically , such as species depletion associated with unsustainable fisheries management.

The world economy will in part react spontaneously to these tensions, through increased prices or changing consumer preferences, for example. But this reaction would take a long time and would be insufficient to avoid the welfare losses associated with environmental degradation, because traditional economic tools, such as clear property rights or pricing mechanisms, are lacking or incomplete for many environmental goods and services such as climate or biodiversity.

In addition, current policy settings are either inadequate to deal with such imperfections or can even accentuate the tensions, especially in developing countries, for instance, through the widespread use of fossil fuel subsidies (an issue which also applies to developed countries, as discussions at the G20 showed). There are also the traditional difficulties of dealing with low-probability and high-impact risks, and in implementing policies whose downsides are immediately apparent, but whose benefits are only seen in the longer term.

However, the growing recognition that we are in a “second best” world provides opportunities for policy reforms which generate both economic and environmental benefits.

More fundamentally, aside from these win-win policies, shifting towards green growth would require measures to mimic or create missing markets, by using the likes of carbon pricing, taxation, setting standards, regulations, and so on. It also means better informing consumers about environmentally friendly options and facilitating innovation that would put the economy on a resource-efficient or low- carbon trajectory, thereby breaking our current dependence on “dirty” demand patterns and technologies. These policies would have a cost, but would increase the welfare of current and future generations.

W e should also harness the growth potential that arises from environmental concerns through environmentally-related innovation, and environmental goods and services industries.

Such a strategy would recognise that the quality of growth is at least as important as how fast we grow. In other words, the objective should be to refocus the growth heuristic to better incorporate things like natural capital, the value of ecosystem services or the costs of environmental damage. This also implies paying more attention to the implications of green growth policies , or the lack of them , for the distribution of income and wealth.

As the OECD has emphasised since the financial meltdown in 2008, the current crisis provides an incentive to change course and overcome some of the barriers to better policy. Governments recognised the need to develop new sources of growth when they adopted the OECD's Strategic Response to the Crisis in 2009. They must do more to make this dynamic happen. Some of the stimulus plans included “green” procurement, for instance. In 2011, as budget deficits are being reined in, instruments such as green taxes and innovation spending must be encouraged. Green growth could set us on a new path, if we recognise that there is no fundamental conflict between sustained growth and the environment, provided the right policies are implemented.

Over half of the companies on the 2009 Fortune 500 list began during a recession or bear market. Downturns can breed innovation and entrepreneurship, and spark new and much needed sources of growth. There is, at the same time, heightened risk aversion and a scarcity of finance that limits the capacity of the innovation system to deliver.One of the essential lessons in the OECD Innovation Strategy issued to governments in May 2010 is that countries that harness innovation and entrepreneurship as engines for new sources of growth will be more likely to pull out of and stay out of recession. Governments can help by creating the environment and safeguarding the drivers of innovation, even in difficult times.

In the end, human ingenuity and the entrepreneurial spirit are the essence of innovation. While scientific and technical know-how is essential for advancing knowledge, more is required. Innovation also relies on broad and relevant education that builds entrepreneurial skills, initiative and creativity, and teaches individuals how to work as part of networked teams. Courses need to be adapted to equip students with the capacity to participate in the creation, diffusion and adaptation of innovations, where learning and applying new skills becomes necessary throughout their lives.

Science is vital to innovation, especially to generate “step changes,” such as the invention of the transistor or the first vaccine. Fundamental R&D is mostly undertaken and funded by governments, and provides the foundation for future innovation. The Internet, which owes much to public investment, is a case in point. Governments should especially avoid cuts in basic R&D directed at social challenges, such as neglected diseases like malaria or renewable sources of energy. Tackling these can generate a double dividend of economic growth and improved welfare.New and young firms-frequently the offshoots of universities or large established businesses-are increasingly important and tend to be the source of radically new, disruptive innovations that upset existing business models, and boost both productivity and employment. Data from the US shows that firms less than five years old accounted for nearly all increased employment in the private business sector over the last 25 years.

What can governments do to nurture more of these “gazelles”? For a start, policies must do more than simplify administrative procedures for starting a business; they should promote an environment that enables firms to grow. They must provide portability of social benefits, such as pensions and health insurance, to encourage would-be entrepreneurs to take the risk of setting out on their own. Policies must also facilitate access to risk capital, which is all too scarce in the current environment. Securing a solid infrastructure for innovation is also critical: high-speed broadband, for example.Policies to foster innovation will only deliver full results if they take into consideration the wide scope of activities that innovation brings together. Technology is important, but what counts at least as much is how to harness new, and sometimes unintended, knowledge in more productive ways. Kenyan mobile company Safaricom began offering its prepaid customers a service for sharing minutes. Quickly, the sharable minutes became a form of alternative currency as customers began using them to send money to relatives or pay for services, such as taxi rides. Safaricom launched a nationwide banking service that allows Kenyans to send money via SMS without the need for a bank account.Policies that focus only on R&D miss out on such potential. The success of policy relies on enhancing the performance of the system as a whole and ironing out the weak links that can hurt performance.

This global aspect will become even more important in the years ahead, as new global players such as China, Brazil, India and South Africa shift the topography of ideas, and how they are traded and invested. For economies around the world, a good dose of innovation can deliver a double win. It can help drive a sustainable recovery, and deliver progress on social and environmental goals.

Adapting to a new economic landscape-a window of opportunity for the developing world?

Mario Pezzini , Director, OECD Development Centre

Over the last decade, the global economy has been undergoing some profound changes. The economic centre of gravity has shifted east and south to such an extent that by 2030, according to OECD Development Centre calculations, developing countries will account for nearly 60% of world GDP. India and China have received a lot of attention, but in fact improvement in economic performance has been shared among a large number of developing countries.

Whereas the 1980s and 90s were very much lost decades for most developing countries, registering low, stagnant or even negative growth rates, in the 2000s there was a sharp upturn in their economic performance. Even after the global financial crisis, the prospects for the majority of developing countries are much better than they have been for many decades-underpinned by better macroeconomic management in developing countries and more dynamic south-south trade, investment and co - operation. Although progress in human development has been uneven, there have also been some major unsung successes in terms of, for example, the reduction in infant mortality or the expansion of primary education.

In reality, a new window of opportunity is opening up for global development. At the OECD Development Centre, we are following closely these new dynamics in the global economy, monitoring trends in south-south cooperation and investment, and exploring how policies and development strategy can be adapted to the new global environment in order to harness the ir benefits. For example, there is an increased focus on flows of development finance that go beyond traditional aid-remittances, private flows and domestic resource mobilisation (taxation)-to be leveraged to increase living standards in developing countries.

Despite a positive outlook, the challenges are still numerous. As this new global economy evolves, it is crucial that the poor living in more vulnerable developing countries are not left behind. At the same time, it is important to recognise that less than a quarter of the 1.3 billion people living under $ 1.25 a day live in low income and vulnerable countries-because of improving economic performance, the vast majority now live in middle income countries. This has major implications for policymakers, putting issues such as social protection and redistribution policies at the top of their agenda. The 2011 edition of Perspectives on Global Development will look at the social implications of this new economic landscape. Focusing on social cohesion , it will explore what it is that makes us feel part of a society or keep s us excluded from it , and what the paths to upward social mobility are .

For most of human history, a large majority of the world's population depended on the land to earn a living, yet few people could be sure of always having enough to eat. Now, in the OECD countries hardly anybody is a farmer, yet the main nutritional problem is obesity; we throw away up to a third of the food we buy, and more agricultural crops are used to produce biofuels. The same is starting to happen elsewhere too.

This has only taken a few decades. The main reason is innovation, and not just in farming technology and methods. Farm structures have been transformed, and there are now much fewer, but much bigger farms. Policies have changed as well, to encourage farmers to adopt new ways of working. New markets to trade what farmers produce have emerged, thanks to better communications and transport. Richer consumers have boosted demand.

Unfortunately, some of the old problems have yet to be solved. Almost a billion people are still hungry, and the cost of food is a major worry for many. It's not that food isn't available-agricultural production continues to outstrip population growth-rather that people are too poor to afford it. Even under the most conservative assumptions regarding demographic, socio-economic and environmental trends, the demand for food will expand significantly in the foreseeable future, at the same time as the land available to produce it is placed under greater strain from urbanisation, environmental degradation and other factors such as the demand for biofuels. Climate change presents new challenges, and water supplies in some parts of the world are increasingly under stress.

This doesn't mean the world faces a food shortage any time soon. Trends can be influenced. Farming has always been resourceful and inventive. Science and technology are exploring new solutions to the physical challenges. Changes in policies and practices can encourage a shift towards sustainable means to produce and distribute enough food to satisfy the expanding demand without destroying the planet's resources. If the broader challenge of bringing development to the poorest countries and reducing poverty can be met, food security will follow.

The Copenhagen Accord, increased funding for low-carbon technologies as part of fiscal stimulus packages, and the G-20 and APEC commitments to eliminate fossil-fuel subsidies are important steps forward, but they fall well short of what is needed to meet climate goals. This is one of the many messages that resonate from the 2010 edition of the IEA's World Energy Outlook .

The central scenario in this year's Outlook -the New Policies Scenario-takes account of the policy commitments that have been announced by countries around the world. It sees world primary energy demand rising by 36% between now and 2035. Emerging economies, led by China , responsible for 36% of the increase , and India , 18% of the increase , are responsible for the vast bulk of the growth.

Fossil fuels remain the dominant energy sources in 2035, though their share of the mix decline. Although these projections represent a tangible improvement on past trends, they point to a likely temperature rise of over 3.5°C in the long term, which experts tell us would have unacceptable implications for the planet.

In order to have a reasonable chance of achieving the Copenhagen Accord's goal of limiting the temperature increase to 2°C, the concentration of greenhouse gases needs to be stabilised at no higher than 450 ppm CO 2 -eq. The WEO-2010's 450 Scenario sets out a roadmap for how the energy sector needs to evolve to meet this objective. It assumes vigorous implementation of Copenhagen Accord pledges to 2020 and much stronger action thereafter.

The measures that would need to be adopted-including improving vehicle efficiency, increasing deployment of electric vehicles and expanding the use of biofuels-would have important repercussions on the oil market. For example, oil production peaks at 86 mb/d just before 2020 in the 450 Scenario, as a result of weaker demand, falling briskly thereafter. Oil prices are lower than would otherwise be the case. Nonetheless, the main oil resource holders continue to benefit from growing oil exports and increasing oil-export revenues, as oil production in most non-OPEC regions is set to decline.

The message is clear: if governments act more vigorously than currently planned to encourage more efficient use of oil and the development of alternatives, then the growth in oil demand might begin to slow down soon and, as a result, we might see a fairly early peak in oil production. That peak would not be caused by resource constraints. But if governments do nothing, or little more than at present, then demand will continue to increase, supply costs will rise, the economic burden of oil use will grow, and the global environment will suffer serious damage.